Monthly Archives: December 2011

Cop Logic for 2012

The book where I first read the phrase “Cop Logic” is lost to memory, but the concept stuck. A modern form of Occam’s Razor,  the process of cop logic states that when uncovering the violent death of a housewife in her home, and finding out that the ne’er do well husband is missing, it doesn’t make any sense to think up any scenarios beyond the husband’s guilt until he is found and questioned. Process must still be followed, but experience dictates a 95% probability the husband did it, and its best not to get distracted until that possibility is investigated.

I want to thank mining and energy analysts for so clearly supporting the application of cop logic to investing for 2012. For eight years, analysts in the resource sector have, correctly for much of the period, touted Chinese industrial demand for the “tree grows to the sky” supercycle in their sector. Over the past two weeks, however, Chinese demand as a catalyst for investment has all but disappeared in favor of potential supply disruption – geopolitical concerns in Libya and Iran for oil, labor disruptions in South America for copper. To see this as a bad sign we only have to remember what happens on Criminal Minds when the defendant is forced by new information to change their alibi.

Cop logic clearly implies slower global economic growth for 2012. It is entirely probable that the European Union may be saved by ECB intervention, but I would not hazard a guess on this either way. What is evident, however, is that even if the Eurozone is preserved, massive austerity for southern Europe will be a precondition for the rescue effort. For investors there appears only two potential outcomes – a horrendous structural implosion or a preservation strategy for the current system that all-but guarantees painful economic reforms and deep recessions for Italy, Spain, and other member nations.  Cop logic says rising GDP growth for Europe as a whole is simply not in the cards without divine intervention.

Trade data, while notoriously inaccurate*, indicate that the Eurozone and the U.S. are roughly equal in size as destinations for Chinese exports.  A significant decline in European economic activity clearly implies a headwind for 2012 Chinese economic growth. Economists will correctly point out that China’s economy is less export-driven than most believe, much more sensitive to infrastructure and real estate development. Unfortunately, as professor Chovanec details HERE, the Chinese real estate bubble us currently imploding, taking the balance sheets of a number of regional governments with it.

Cop logic also has implications for Q4 corporate capex although here there may be a silver lining. As Oracle’s recent results indicate, global CFOs responded to the potential for a European economic disaster by suspending capital expenditure. This only makes sense – investing in expansion is risky enough with a strong global backdrop. Earnings season for Q4 is likely to uncover a significant drop in corporate spending across the globe, which will affect revenues for large swaths of the S&P 500, most notably in technology, media and industrials. However, this trend could be temporary and stock sell-offs in these sectors could provide buying opportunities as conditions stabilize.

The sell-side bias towards optimism makes it easy to predict a wholesale attempt at obfuscation for 2012, giving us page after page of reasons why companies are likely to “side-step” a global economic slowdown. As we can see above, the process has already started for resource stocks as the bullish rationale adapts to a new economic reality. We will be given ample reason to invest further in cyclical stocks despite the fact that slower global growth almost by definition ends the possibility of relative outperformance. For this reason, cop logic will be instrumental for investors this year.


*It is one thing that Apple products are considered imports from China – they are assembled there – although the profit stays in Cupertino. But the calculation of the value of exports is archaic. Boxes of, for instance, Windows 7.0 OS disks, are valued at something like $20 per pound at the shipyard.

Asset Price Deconstructionism: How Big is a Balloon?

French philosopher Jacque Derrida caused a plague revolution in literary circles that continues to inaffect academic circles to this day. Termed Deconstructionism, the theory proposed that in literature, and by extension painting and sculpture, there was no such thing as objective value. In short, the worth of a work of art could not be separated from the reader. If the audience determined that the poetry of William Blake, for example, had no relevance to their experience, then it was worthless no matter what anyone else thought. To the extent that deconstructionism led to a reassessment of the dominance of Dead White Males in history, it was entirely healthy. Its wholesale adoption in college English departments, on the other hand, is an ongoing disgrace. I have no problem believing that current IQ testing is inaccurate and unfair for inner city kids because of the context of the questions, but the second this thought leads to Hamlet being crap because a high school student “doesn’t get it”, I have to tap out.

A similar process of Deconstructionism is occurring in asset markets as most conceptions of objective equity and debt values are being tossed out the window.  The valuation of investment assets is, of course, a matter of debate. However, for the sake of argument let’s accept that most valuation techniques are variations on the primary theme that a “hard value” can be determined by the present value of future cash flows. This is a blog post and I’m not getting paid, so we’ll keep the discussion of correct discount rate simple, assuming  a blend of government rates.

This underlying assumption of this classical valuation technique was that the discount/interest rates were only peripherally related – the economy, as reflected by the discount rate, went a long way in determining the relative value of the cash flow stream of the investable asset. This is the relationship that’s been completely thrown on its head.  The Fed and the ECB are determining rate policy in response to credit, not economic conditions, arguably with the sole intention of boosting asset values. History will judge whether this is a good idea or not, but it is clear that rate policy is now largely disconnected from current economic activity. This in turn implies that the validity of current rate policy is arbitrary in the same way that Deconstructionists believe that the value of Shakespeare is arbitrary – dependent on the reaction of the audience or markets.

The preponderance of technical analysis in the current market is an important contributor to this phenomenon. Technicians eschew fundamental analysis in favor of careful measurement of short-term investor behavior. With reference to Graham’s belief that the market was (to paraphrase) “a voting machine in the short term and a weighing machine in the long term”, technicians are fully concentrated on the former. This is not to criticize technicians, far from it – during the past three years ignoring technicals has been a sure path to investor bankruptcy. But, the fact that the vast majority of current trading activity is determined by an investment philosophy that completely fades any concept of intrinsic or objective value, furthers the argument of this post – that the market is operating without the net of accurate asset price valuation.

To attempt to determine the “correct” value of an investable asset in the current market is to ask “how big is a balloon?”,  dependent on how much central bank air will be pumped into it.  The market today, in light of the ECB’s LTRO program is nuts – being in uncharted waters, I wouldn’t predict market disaster as any more probable than any other scenario. At some point though, equity and debt markets will have to settle into some form of homeostasis where future values are in some way predictable. Until then, we are just gambling on coin tosses and hoping for the best, living in a world where The Di Vinci Code can be considered our highest artistic achievement if enough people agree.

Progress is Not Guaranteed: The Long, Long, Long-Term View

I have no idea where I originally saw it, or exactly when, but there is a photo I’ve been thinking about for at least 20 years. Shot from a helicopter in an unnamed mountainous region of Europe, the foreground was dominated by the intuitively perfect arc of a Roman aqueduct extending from higher altitudes.  At least 1700 years old, the structure was not only representative of the pinnacle of pre-Christian architecture and engineering but also an excellence in construction that has clearly since faded from modern consciousness.  In the background of the image was a farmer struggling with an ox and plow, a combination that would have been familiar to any medieval peasant. The lesson: human progress does not always move forward.

I am not about to predict a new dark Ages here, although its always psychologically tempting in some weird way,  – religiously unhinged, sandwich board-toting street preachers and Marc Faber are just the physical manifestations of an apocalyptic impulse in all of us.  But even if we’re going to ignore such base, lizard-brain impulses we do have to recognize that changes in the broader sweep of economic history may be in play currently, with a commensurate questioning of previously-consensus “givens”.  Conventional economic projection models based on inventory cycles, using only post-WWII data are currently dying the Death of a Thousand Cuts, modified to the point of irrelevance as the Rogoff-Reinhart  interpretation of the GFC, based on centuries of data, steadily assumes dominance.  (Yes, I saw the Romer editorial. Ii made good anti-Rogoff points but I found it unpersuasive in the end). Investing rules of thumb like the Law of 20 – S&P 500 PE ratios plus CPI should add up to 20 – are also being jettisoned, at least temporarily.

Political assumptions are also at risk along with economic. Frustration with corporate rent-seeking in Congress and the subsequent black comedy of incompetence have left some commentators desperate enough to look to China’s penchant for soul-crushing oppression as a source of socio-economic answers, as Reihan Salam rightly ridicules.  In terms of overall political discourse, technology has enabled a degree of polarity among left and right that all but prevents reasonable discussion. I would also argue that current hyperbolic, inflexible political environment is indicative of tangible, fight or flight, backed-into-a-corner fear. The right is terrified that the forces of modernity have swamped their Cleaver-esque view of the American Utopia. The left sees the potential that the welfare/nanny state, protector and primary implementer of “progressive” ideals, is no longer economically sustainable.

“Shit’s broken” as the great online sage @marketplunger is fond of saying. And unlike the 1930s, where US personal savings were just lying around awaiting to be mobilized by FDR, the White Knight that will make the Western world debt problem go away for a while is less obvious. Certainly the all-purpose, 20th century solution to structural economic problems, “just throw borrowed money at it”, appears exhausted. Even if, as is likely, massive fiscal stimulus is the prudent response to the current output gap, the tipping point where the mid-term marginal utility of more debt is negative can not be too far off in the future unless existing debt loads are addressed in some way.

Proclamations of doom sell newspapers generate page hits but the majority of human history has been a case of more banal “muddling through”.  It is also true that dominant, century-long social and economic trends wax and wane over long, long periods of time. The structural issues of sovereign debt, barring some type of trade-oriented or (less likely) military conflagration, will likely be addressed over the period of at least a generation, certainly longer than our modern, shorter attention spans are used to.

The most likely scenario is a “muddle-through” but we will, I think, have to remain conscious of the broader arcs of history. If, as Barzun and many others have argued, the driving forces of western civilization and its global dominance are waning, the shift to a more Asian-centric world will be a “once every 500 years”-type revolution, with considerable potential for upheaval. We are already seeing pictures of parkland and wild vegetation within the shadow of Detroit’s Renaissance Center, echoing the aqueduct and plow of my remembered photo. Anyone gambling on the same process occurring in sight of the Empire State Building would be a fool but still, in following the ingrained habits of the recent past we should remain cognizant that we are not exempt from history, or the fact that progress is not inevitable.

Hitchens and Financial Blogging

Kids playing touch football on the playground are likely to yell out the names of their favorite players when something particularly good happens. “Montana to Rice!” in my era and, if such things as touch football are still allowed at recess now, it’s probably “Rodgers to Jennings!”. Even as a kid, though, you know you’re dreaming, that the most active imagination is not sufficient to really put yourself there in front of 60,000 fans. It is among the most innocent, productive kinds of hero worship.

At that age, going to class is a constant reminder of the outside world and what will be expected of you, but for me and my friends “real life” truly started when we realized that we would not play professional sports. At 10 years old, or twelve or, (if you were really lucky) seventeen, came the realization that you were not, in Palahniuk’s words, “a beautiful and unique snowflake” and were destined to toil away without endorsement contracts and thousands of adoring fans. Far from a sob story, this is merely a part of growing up experienced by 99.99% of the population.

These were the type of thoughts in my mind when deciding to write Interloper. Who the fuck was I to write opinions and expect anyone to read them? The downside risk, while emotionally higher than you might think, was small enough to write anyway, but still, I consistently struggle from the same fear of conceit as on day one when I wrote the first post:

To construct your own corner of the Internet in blog form is to profess some knowledge or perspective that you believe unique – we must not hide from this. I have figuratively wailed and gnashed my teeth at this inherent self-indulgence but have, as you can see, come to terms with it. My conclusion in the end was that walking around with the conceit of a unique combination of experiences and thought process, and not testing this hypothesis by opening the results to virtual ridicule, represented a degree of ego defensiveness bordering on cowardice.

If Montana and Rice were the gods of 1980s touch football, Christopher Hitchens was the colossus of opinion writing. And if as a kid I played for the pure joy of sports and emulated its heroes, the blog could be an  adult version of the same thing, with the delusions of grandeur largely rubbed away but with the same will to competence and competition. I can’t say that Hitchens was a particularly conscious influence, my blogging Joe Montana, although I avidly read and generally loved all of his essays that I came across. Even though I frequently disagreed with him in the same way I hated the 49ers, there was the same respect for an artist in their prime that superseded the exasperation. In hindsight, his writing must have had some effect, or at least provided support for a bias towards skewering popular falsehood and announcing the Emperor’s nudity. It is almost impossible to believe that the decision to attempt something is completely separate from exposure to its greatest living practitioner.

There are structures and theologies (to use the term loosely) within finance that deserve the torrent of ridicule Hitchens reserved for the hypocritically religious, Islamofascists and intellectually obtuse.  The conceit that what hurts the financial industry by definition hurts America is a big one as are specific utopian parables like EMH and Modern Portfolio Theory. The many ways in which the finance industry manipulates its alleged clients by encouraging their “predictable irrationality” should be enough to keep me busy on their own.

In looking back at previous posts, the only similarity Interloper can claim with Hitchens’ work is that it is more against conventional financial wisdom and practices than for anything beyond looking at issues in a different way (a new realization that distresses me, btw). If at some future date I can do this with 20% of the master’s intellectual energy and erudition, I hope I remember to throw up my hands and yell “Hitchens!” no matter who’s watching.  Whenever I consider patting myself on the back for successful contrarianism, I will try and remember that Hitchens spent a few hundred hours writing a book lambasting Mother Theresa. (I mean….DAAAMMNNN.)

Today is not the day to enumerate them, but I am well aware that Christopher Hitchens the person encompassed numerous flaws and excesses, as did his belief system. As someone who deeply respects the discipline of the devout, it was never a consideration to holistically adopt his philosophy anyway. But above everything else, from even this distant vantage point it was clear that he was a man bulldogging his way in search of objective truth, or his version of it, and truly did not give a fuck who’s feelings got hurt. That kind of courage, and more importantly the background labor necessary to develop it, is definitely something to aspire to.

Reading Fiction Will Make You a Better Investor

I know I’m not stupid. But even though I was always among the three brightest kids in class I have a good friend who, right brain or left brain, is quicker than me in every way. He, in turn, tells a story about a visiting professor who was writing the answer to a question on a blackboard and was asked a second question, after which he wrote the answer to that with his left hand, while finishing the answer to the first with his right. My buddy’s response was, “Well, I’m smart, but I’m nowhere near that gifted”.  The investing lesson here was that if I was just going to think linearly, along the same path as everyone else, someone with significantly higher brain horsepower was going to get there first, and potentially earlier enough to be filling my bid to take profits.

But the fact that my family history involved frequent displacement early on turned out to be a lucky break – the “making new friends” lag time was spent reading, fiction, to the point where the habit became permanently ingrained. Unwittingly, I was learning lessons in empathy that would make me a much better investor.

There are obvious examples of this. David Liss’ “Conspiracy of Paper” provided a highly enjoyable depiction of the collapse of the South Seas bubble in the early 18th century, with the commensurate motivations of businessmen, government and criminal gangs. Through the fictionalized account, it was clear that the South Seas bubble, the result of abuse of the new Limited Liability structure, is roughly but usefully analogous to the recent securitization/financial product/CDO upheaval. The investing-related utility of other novels is more subtle. Wolfe’s Bonfire of the Vanities (the book, not the wretched movie) is more than 20 years old but continues to provide insight into the hubris and social abstraction of the new “Masters of the Universe”, hedge fund managers. Aksyonov’s criminally under-read “Generations of Winter” has nothing to do with finance but does, by presenting the horrors inherent in Stalin-era Russia, provide context for how messed up the present leadership, and by extension the economy, of Russia truly are. In more contemplative moments, you can gauge the mood of oppressed Chinese against oppressed Russians.

Unlike historical accounts, through well-drawn characters it is possible to absorb the world through another perspective, an immensely valuable skill for investors looking for ideas (or trouble). A memory bank of fictional characters will also help when the market “hive mind” pushes prices in unexpected directions, answering the question “what kind of person buys here?”.

The primary lesson of fiction is learning “this is how people act”, when they’re scared, confident, happy, determined or demoralized. Not how I would act, or how I think they should act, but how the combination of different experiences and different patterns of cognition lead to aggregate outcomes. Empathy.

Fiction is the longest-running, most rewarding relationship of my life with little or no adverse side effects, so forgive the evangelical tone. I do believe reading fiction, despite the time-sucking nature of the process, provides a competitive advantage for investors  by providing wider context for decision making. I can’t answer two questions on a blackboard at once, but somewhere I have read a book with a character that will give me an idea how a person who can will react to the markets.

Random Hits: Chinese Economy as Winery, Understanding Europe, and “7:30am Nobodys” Ctd.

Consider the Chinese economy as a winery operation. The foot-stomped sludge of crush grapes represents investment, some combination of public, private and foreign capital. The tap that will eventually be shoved into the cask is the means of extracting the finished product, which for our purposes is analogous to sustainable economic growth. Like all metaphors, this is an over-simplification, but it does embody the time lag between investment and output as the fermenting period. (The biggest flaw clearly is the considerable output generated immediately by the investment – construction revenues and the spent wages of construction workers, etc, but stay with me for a second.)

No national economy operates frictionlessly at 100% efficiency. Any misallocation of capital, whether bad tax policy, inefficient social safety net spending, whatever, implies that some investment is wasted. There are, in other words, leaks in the wine barrel.

The issue for the China and industrial metal bulls at present is the state of integrity of the wine barrel. The bullish scenario for China is dependent on a resurgence of investment after a period of credit control designed to slow inflation. This period, however, also corresponds with further revelations regarding capital misallocation in the economy, most recently Shedlock’s piece today (“China’s Deserted Fake Disneyland”) outlining the severe declines in Chinese real estate prices. The world’s best blog, Financial Times Alphaville, has previously outlined the dependence of regional government finances on revenue from leasing land and while government finances remain extremely opaque, the large scale use of Special Purpose Vehicles to finance real estate transactions has been documented. Falling land prices are a major threat to the viability of these structures.

The Chinese government will undoubtedly end credit restrictions if growth falters and indeed, they are already doing so. The wisdom of investment in the China Story will depend on whether a renewed surge in credit, our crushed grapes flow, will merely leak out of the cask before it can be tapped.

Europe: The inner workings of the Eurocracy have been maddeningly unintelligible of late, most notably with its seeming ignorance of the market’s avowed belief that the ECB must provide massive liquidity before the crisis is over. The Washington Post’s Ezra Klein has, at least in my opinion, found the most believable framework for understanding political motivations. In Germany’s High Stakes Bet, Klein concludes that Germany is playing chicken with the EMU, using the crisis to bludgeon Southern Europe into conformance with the German model of fiscal prudence. When the Germans are satisfied, they will pave the way for “QE Europe” to repair government fiscal health and recapitalize the banks.   No other theory makes as much sense.

Clarification for “OWS and Why Anybody Not at Their desks at 7:30 is a Nobody”: I knew, writing that post, that it would generate some annoyance and was sorely tempted during the process to soften it up. But I didn’t and spent a good part of the day reading emails through my fingers in the same way I’d watch “Saw II”.  I am not one of those people who enjoys pissing people off or is likely to annoy readers for the sake of page hits.

In order to feel like there’s any point in blogging at all, it is important to choose topics that do not seem to be discussed elsewhere. Yesterday, unfortunately, this led me to a depiction of the worst kind of bigoted chest thumping behavior apparent in finance. But, given that I stand by the accuracy of the description, editorially I felt it was better and more interesting to tell the ugly truth than water things down into acceptable, less accurate platitudes to avoid offense.

This is not to say that if I re-wrote the piece I wouldn’t change anything.  The title was a bit, umm, blunt, but most of them are – it’s a big Internet and marketing is an ugly business. I certainly would have been clearer as to the targets of derision, because I have never heard it focused on professionals in most other fields. I should have specified that the feelings of superiority I described where more reserved for the professionally disaffected, the protestors who rotate from G20 meetings to any rally likely to be featured in the NY Times the next day.  I would also have mentioned the interesting fascination among financial professionals with people who “work with their hands”, a feeling consistently strong enough that it would surprise most outsiders. I attribute this to the lack of “tangibility” in finance that makes the thought of being a bricklayer, and building something visible and lasting, very attractive.  People who build their own businesses, regardless of scale, are also targets of admiration.

In the end however, the self-congratulatory arrogance of higher-end financial professionals is, in my experience, a general fact. It is also a fact that when the alarm goes off at 5:00am, motivating yourself to get up often involves in internal monologue featuring a myriad of half-truths about how important you are in the grand scheme of things, even if you know most of them are indefensible. A lot of the locker room-style humor on trading floors, really the primary source for the material from yesterday’s post, follows a similar pattern and it is not always clear the extent to which people actually believe it, or are just venting or trying to make someone else laugh. It is nonetheless there and at least you now know about it.

OWS and Why Anyone Not at Their Desks by 7:30 is a Nobody.

I have worked closely with Institutional Equity Sales desks for the majority of my career and have been tempted to accept offers to work there. There are two reasons why I haven’t.  One, the politics surrounding the dispersal of client accounts is Machiavellian enough to make the backroom dealings of the medieval Vatican seem like a rural PTA meeting. The other reason is that, given my later start in the industry, I was too old. Unless you are firmly established on the Desk by your early 30s it is unlikely that your energy level will hold up long enough to realize the considerable compensation potential. Those fuckers work hard. The basic hours, at your desk at 7:00, meetings at 7:30, 12:05 and 4:10 with the intermittent time spent either generating or shepherding your clients’ trades, are not prohibitive. The bigger problem is that Wednesday through Thursday, it is more or less required that you entertain your clients according to their proclivities – dinners, strippers, shows, whatever – until late at night before arising again at 5:30 to head back in to the office. Not occasionally – this is every week.  Recent layoffs have only made this worse, to the point I would like to see an intrepid, well-connected reporter dig in to the insane growth of the illegal stimulant market which is reaching 80s levels again as aggregate job security wanes.

I am again just using Institutional Sales as an example. The workdays for traders and bankers, particularly during a big deal, can be even more onerous. As a whole, the level of effort expected leads to the generally-accepted belief within Capital Markets that anyone not at their desks by 7:30 is a nobody. The most common response to the experience of getting a coffee at 9:15 and seeing people rushing to the office in their coats,(and this is a topic of discussion on the floor), is a bemused “what exactly do you people do that you can get away with starting at 9:00?”.   By definition, it can’t be that important.

The anti-finance movement can, if they carefully ignore some of the more economically vital aspects of the industry, frame their argument in terms of “all you guys really do is shuffle paper around”.  What they under-estimate, however, is how hard industry participants work at “shuffling papers around”. It is extremely difficult for anyone, including me, to take someone seriously when they work less than 50 hours per week. Unless they’re semi-retired, no one we know who works 35 hours a week is even relevant, never mind qualified to re-regulate the industry.

The work ethic is clearly a function of simple economics. The monetary upside in finance is arguably higher than any other so the candidates to replace the more complacent employees are at least in the 100s, probably 1000s and everybody knows this. The means by which the less committed get jettisoned can get pretty nefarious – I’ve seen three or four women ousted during their maternity, albeit with big checks – but everyone understands, and largely accepts, the logic behind it. Not only that, we take a sort of black humor pride in it.

The psychological outgrowths of this type of environment are pervasive and powerful. When OWS is trying to comprehend the viciousness of pushback, they need to keep in mind that the level of personal investment for industry professionals, years upon years of 60 hours weeks and four hours of sleep a night, is not something you ever, ever want to see threatened by a Tobin Tax. And this is particularly true if the complainants’ primary motivations, and theological certainty, arise solely from one charismatic professor teaching Rawls during an “exhausting” 20 hour per week class load. You may have a point, nobody knows better than we do, but we’re not going to consider you credible unless you work for it.

Most Likely to Succeed in Finance: “Unlucky at Love” E-mailers

When no brokers are in the room, management will refer to them as “sales reps” or “the sales force”.  When they are in the room, the same executives will emphasize the entrepreneurial aspects of broker business-building and the fact that they are the “lifeblood” of the company. They will mean it, too, but the mental framework of brokers as higher-knowledge, higher-paid appliance salespeople at Sears dominates their decision making nonetheless.

The denizens of Capital Markets, while recognizing the occasional value of retail-facing brokers, permit themselves a higher degree of scorn for the average broker but, importantly, this is often a defensive reflex designed to emotionally shield themselves from the recognition that, in many cases, their jobs are no less sales-oriented.  The similarities between the typical broker day and that of an Institutional Salesperson are obvious from previous Interloper post “Sell-Side Optimism”.  Institutional traders, who for outside observers may appear more immune from the less savory techniques of Al Bundy, have their own selling job to do, buttering up institutional traders over steak to cement relationships with the goal of receiving the biggest order tickets. Investment Bankers represent sales skills at the highest, money-is-no-object level. The $5k custom made suits, chartered planes and $2500 per bottle sauternes are part of a package designed to impress CFOs enough to “take the pitch meeting”.

The fresh out of Wharton newbies and Wall Street fanboys cringe at this depiction of finance with sales skills at its center. Drunk on “Den of Thieves”, “Barbarians at the Gate”, Gekko and other bizporn, their romantic notion of finance revolves around innovation and big ideas representing self-evident genius. They imagine split-second decision making with $100s of millions as a weekly occurrence from atop their leather, 58th floor thrones and the thought of making numerous unwelcome, unreturned cold calls never occurs to them.

Like Hollywood, there are the super-talented or super-lucky who do become magazine-cover, grossly wealthy, stars. But also like Hollywood, for every celebrity there are 10s of thousands of hangers-on, begging for single lines of onscreen dialogue with the star before heading for their shift at Starbucks. Despite Melanie Griffith’s experience in Working Girl (“Trask. Radio”), the vast majority of I-banking cake is generated by copying the one good idea generated every five years (CDOs, Leveraged Buyouts, etc) and flogging the shit out of it to any client where it might apply. (I have seen a few cases where this process is made obvious by the spelling mistakes in legal documents from the initial, trend setting deal being literally cut and pasted into new docs, even when it was another company that did the first one.)

The catalyst for this “sales skills are everything” post were the hilarious emails posted HERE, from frustrated wannabe male financiers pushing hard for second dates in spite of the comic failure of the first. For sure they’re exaggerated examples but the brutal, thick skinned, pigheaded sales skills necessary to succeed in finance are clearly on display (as is the obsessive level of detail – “playing with your hair is a clear psychological sign of flirting, so I’m confused….”. No industry rewards OCD like finance). The odds of these completely non-self-aware idiots ever sustaining a relationship that could be considered “adult” by any impartial observer are, or course, negligible. On the other hand, the prospects for their career in the industry are probably bright, particularly if they hang around long enough to learn to soften the rough edges of the pitch. I would even extend this thought to a warning – if the names of the misguided emailers become public, I would be very careful about public ridicule. These dudes are exactly the right personality type to wind up on the cover of Forbes in the next decade.

In The Hope That 2012 Is Not Another Year of Running Around in Circles

I’ve read about 3000 blog posts and news articles this year, scanned three times that many, closely parsed 200-400 research reports and spent the remainder of the hours between 7:30am and 6:00pm in search of other sources of information. The fact that the S&P 500 stands almost exactly at the same level as in January implies that the majority of this effort, intellectually stimulating as it may have been, has been a waste of time.  We have spent almost 12 entire months chasing our tails, jumping at economic shadows only to find ourselves in the exact same place we started.

A cursory review of asset prices in 2011 provides a reasonably simple lesson for next year – assess the scenario the market is priced for and the probability of its accuracy. This year the Q1 sell-side consensus view was, as usual, a second half growth ramp-up which, to be fair, was reasonably accurate in term of US data. Equity values melted up accordingly in Q2 until the recovery was largely priced in despite intensifying credit pressures in Europe.   By mid-year, European credit data put the second half growth thesis on extremely shaky ground and it was not a difficult decision, with the precedent of 2007 in recent memory, to avoid getting aggressive for the remainder of the year.

200-page “Outlook 2012” research reports will begin to ooze out in publication shortly. As Josh Brown recently pointed out, the default position of “second half recovery” will no doubt be in full effect. Personally, I will be watching for extrapolation of current corporate earnings growth trends. Aggregate profits have been remarkably resilient while the market has been focused on macro factors  and this will likely result in some early-year table pounding from analysts and strategists. This could, however, set us up for a vicious whipsaw. Global credit problems and the ongoing slowdown in merging markets growth levels imply a rapid, sudden slowdown in corporate capex during Q4, reflecting a declining number of opportunities for investment in expansion.  Falling capex means falling aggregate profits so, in the end, if the sell side is successful in getting profit growth at current levels priced in to equities, I will be looking for shorts.

All of this is subject to change with little notice. My real hope for 2012 is for an actual trend to arise so that it does not turn out to be the giant waste of time 2011 was.  Years like this make us all look stupid, spilling oceans of virtual ink on commentary, implementing billions of dollars borrowed for higher education in biz school or economics only to, in terms of equity prices, run around in circles. This reminder that the finance and investing industries really don’t do anything tangible, just determine the monetary value of efforts by others in the real world, is unwelcome.


Moving through the departure area of a European airport is among the most depressingly enlightening experiences, highlighting the relative anxiety levels of North Americans and continentals.  During the 200 or 300 yard walk to the departure gate, the sedate tone of the inter-regional passengers gives way to the shrill, barely-in-control hive of sharp words and the loud voices of compatriots awaiting the transatlantic flight. There are certainly non-insidious explanations for this – bigger planes mean more people and more noise and there are there are a higher percentage of kids versus business travelers. But the tone, after two sedate weeks of vacation, is so jarringly familiar, such a reminder of the consistently higher stress levels of everyday life at home, that it is clear that other factors are at work.

We rightly view the ambition and innovation of the New World as, in aggregate, the primary catalyst for a superior standard of living to anywhere else on the planet and no sensible person is willing to risk that. It does appear, though, that this urge towards economic progress has undergone a subtle change, drifting away from a somewhat libertarian focus on allowing opportunity to an insistence that things may only proceed under specific terms. Process, in other words, must precede outcomes. Corporate success is, for many, irrelevant if an executive women and minority threshold is not met and no student-centric education reform is permissible unless it preserves the outsized, uneconomic demands of the teachers. We shovel medication at children so that they conform to the way ideal children “should” act.

The type of conformity demanded of different segments of the population varies, largely by geography and economic status, but the high degree of adherence to stipulation appears relatively consistent.  No matter which group people belong to, the number of “rules” to be followed has become oppressive, conflicting, and in many ways entirely unfair. I can barely imagine the stress of the average 30-year old female executive weighing the economic benefits of 12-hour days, which also validating their feminist beliefs, against the urge to start a family.

I have no idea how we navigate increasingly important structural economic issues with every side of every argument holding on to their specific ideologies, around which they’ve oriented the majority of their lives, like grim death. The paralysis of Congress , an easy scapegoat for everyone, is in many ways just indicative of the cultural Mexican Stand-off in society at large.  I’d liked to think we’re not screwed for the next 20 years, but I have yet to see anything resembling empathy across ideological lines since… I don’t know.

Hopefully, in the end, it’s like a giant Chinese finger puzzle and the solutions will begin to appear when everyone relaxes a bit, recognizing that a win for the red team is not inherently a loss for the blues, and vice versa. What is already apparent is that way, way too many people are unhappy and psychologically maxed out, both from adhering to the rules and trying to “outlive” the penitents of the other team in some ambiguous way.  Until the stalemate ends, the big pharma company with the newest anti-anxiety treatment seems like a good hedge.


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